In its complaint, Allstate alleges the defendants "made numerous misrepresentations and omissions regarding the riskiness and credit quality" of the loans backing the securities sold as part of the transaction. JPMorgan Chase acquired Bear Stearns and Washington Mutual — along with the banks’ assets — back in 2008 when the housing meltdown hit. While both firms are technically defunct, each still has structured finance trading platforms unwinding.
Maiden Lane I is a $25.7 billion portfolio of Bear Stearns securities related to commercial and residential mortgages. JPMorgan refused to buy them when it acquired Bear Stearns to avert the firm’s bankruptcy.
The Fed’s losses included writing down the value of commercial-mortgage holdings by 28 percent to $5.6 billion and residential loans by 38 percent to $937 million as of Dec. 31, the central bank said. Properties in California and Florida accounted for 45 percent of outstanding principal of the residential mortgages.
On the key facts behind the bailouts of 2008, regulators have stonewalled the public, the press and even the inspector general of the Troubled Asset Relief Program. On Wednesday, we’ll find out if they can also stonewall the Financial Crisis Inquiry Commission.
Chairman Phil Angelides and his panel will begin two days of hearings on the subject of "Too Big to Fail," featuring testimony from Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Chairman Sheila Bair. Across bailouts from Bear Stearns to AIG, the government has refused to release its analysis of the "systemic risks" that compelled it to mount unprecedented interventions into the financial system with taxpayer money. Two years after the crisis, Mr. Angelides and his colleagues should finally let the sun shine on this critical period of our economic history.
A year ago we told you about former FDIC official Vern McKinley, who has made a series of Freedom of Information Act requests. He wanted to know what Fed governors meant when they said a Bear Stearns failure would cause a "contagion." This term was used in the minutes of the Fed meeting at which the central bank discussed plans by the Federal Reserve Bank of New York to finance Bear’s sale to J.P. Morgan Chase. The minutes contained no detail on how exactly the fall of Bear would destroy America.
He also requested minutes of the FDIC board meeting at which regulators approved financing for a Citigroup takeover of Wachovia. To provide this assistance, the board had to invoke the "systemic risk" exception in the Federal Deposit Insurance Act, and it therefore had to assert that such assistance was necessary for the health of the financial system. Yet days later, Wachovia cut a better deal to sell itself to Wells Fargo, instead of Citi. So how necessary was the assistance?
The regulators have been giving Mr. McKinley the Heisman, but two weeks ago federal Judge Ellen Segal Huvelle made the FDIC show her the Wachovia documents. She is still…
Yesterday’s "paper" (more in the napkin sense than as a synonym for "intellectual effort") by Mark Zandi and Alan Blinder, which was nothing more than a glorified cover letter for selected perma-Keynesian posts in the administration’s Treserve complex, was so outright bad we did not feel compelled to even remotely comment on its (lack of any) substance. A man far smarter than us, Stanford’s John Taylor (the guy who says the Fed Fund rates should be -10%, not the guy who says the EURUSD should be -10), has taken the time to disassemble what passes for analysis by the tag team of a Princeton tenurist (odd how those always end up destroying the US economy when put in positions of power), and a Moody’s economist, who is undoubtedly casting a nervous eye every few minutes on the administration’s plans for EUCs and other jobless claims criteria. Below is his slaughter of dydactic duo’s demented drivel.
Yesterday the New York Times published an article about simulations of the effects of fiscal stimulus packages and financial interventions using an old Keynesian model. The simulations were reported in an unpublished working paper by Alan Blinder and Mark Zandi. I offered a short quote for the article saying simply that the reported results were completely different from my own empirical work on the policy responses to the crisis.
I have now had a chance to read the paper and have more to say. First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model. I have explained the defects with this type of exercise many times, most recently in testimony at a July 1, 2010 House Budget Committee hearing where Zandi also appeared. I showed that the results are entirely dependent on the model: old Keynesian models (such as Zandi’s model) show large effects and new Keynesian models show small effects. So there is nothing new in the fiscal stimulus part of this paper.
Even a win in the World Cup soccer tournament won’t save Europe. Nor will the G-20 meeting in Toronto this week. With Grecian urns, Irish eyes, Spanish flies, and Portuguese waterdogs all up to their eyeballs in debt, it’s only a matter of time before the whole venture implodes. Even after an almost trillion dollar bailout across Europe, Moody’s Investors Service last week downgraded Greece’s debt from A3 to Ba1--junk bonds.
We’ve seen this movie before—in 2008, when it was banks, not countries, reeling out of economic control. Once you recognize this pattern—desperate nations behaving just as the desperate banks did—the next 12 months of news will all make sense. Here is a handy guide.
Greece is clearly Bear Stearns. They’ve taken on too much debt, used derivatives created by Goldman Sachs to put off payment well into the future, and aren’t generating enough tax revenue to pay for their bloated expenses. The cost of Greece’s debt financing is skyrocketing, now 8 percent higher than the benchmark German bund. Either Athens defaults, causing more firebombs to be tossed and even larger riots in the streets, or the European Union arranges a takeover by deep-pocketed Germany.
Germany is the JP Morgan of this story. It will provide a lowball 200 billion Euros to Greece and then end up paying 1000 billion, reminiscent of JP Morgan offering $2 and then paying $10 for Bear Stearns. Now wait a second, I can hear you complain, countries can’t merge like companies.
Of course they can, it happens all the time—though usually when tanks roll. Ask Poland. Or Hungary. In this case, Germany won’t legally own Greece, but in reality, it will absolutely be in charge of fixing Greece’s mess. My sense is the Germans will be quite good at tax collection and not so strong at dismantling the welfare state. But Greek debt will be resolved and maybe the Euro will even rally.
But it won’t be over quite yet. That’s because sadly, Spain is Lehman Brothers. With 22 percent unemployment, and loaded with debt and deteriorating real estate prices, who is going to save it? Tongues will wag that defaulting on debts will teach a lesson to countries that live beyond their means. As a huge exporter,…
Just a few brief comments on the market at the current levels. I was relatively optimistic about the equity markets coming into the beginning of the year. The themes that had dominated much of 2009 (better than expected earnings, accommodative Fed, continuing stimulus, etc) appeared to be largely intact. To my surprise, the rally ran a bit farther than I expected, but Greece and the downturn in China were game changers in my opinion. I was a few weeks early to lay my short positions, but the market ultimately came around to my thinking (better to be lucky than good). Where are we now? In my opinion, we have a global economy that ispre-Greece and a global economy that is post-Greece. The dominoes appear to be lining up in an eerie fashion at this point in time – there are now dozens of negative catalysts in the coming 12 months (which I will detail in a soon to be released report). Although the markets are once again oversold and at risk of a bounce the fundamentals are quickly deteriorating and my expectation of a weak second half appears to be right on cue. I would continue to approach this market with a great deal of caution despite the current oversold conditions.
What do the Germans know? This short selling ban is very desperate looking. I hate to speculate, but my gut tells me that they are beginning to realize how bad the situation is over there. They now understand that the problems in the Euro cannot be solved through intra-country debt issuance and bailouts. The short ban looks like one more act of desperation from a group of nations that have severely underestimated the problems they confront. Unfortunately, I still don’t think they’ve realized that this is a currency crisis and not a solvency crisis. That means they’ll continue to kick the can down the road and markets will battle with the turbulence. This truly does have a very Bear Stearns feel to it.
Will we scare ourselves into a double dip or even a second great depression? Everyone and their mother appears to be in the same camp regarding all the very scary “money printing”. I’ve never in my life heard the drumbeat so loud for fiscal austerity. In fact,
Check kiting is the illegal act of taking advantage of the float to make use of non-existent funds in a checking or other bank account. It is commonly defined as writing a check from one bank knowingly with non-sufficient funds, then writing a check to another bank, also with non-sufficient funds, in order to cover the absence. The purpose of check kiting is to falsely inflate the balance of a checking account in order to allow checks that have been written that would otherwise bounce to clear.
From July 2004 through September 2008, Lawrence G. McDonald was a Vice President of Distressed Debt and Convertible Securities Trading at Lehman Brothers (LEHMQ.PK). He is now a Managing Director at Pangea Capital Management LP. Lawrence is most famous as author of the best selling book "A Colossal Failure of Common Sense: the Inside Story of the Collapse of Lehman Brothers".
MacDonald, in an article at The Huffington Post entitled "The Geithner Deception", lays major blame for the financial collapse of 2008 at the feet of now Treasury Secretary Timothy Geithner. Geithner was President of the Federal Reserve Bank of New York from 2003 through 2008 as the credit bubble expanded and exploded into crisis.
Unsettled Derivatives Trades
McDonald’s premise is that a major reason for the collapse of Lehman and, very quickly, the world’s financial structure, was unsettled derivative trades. The most notorious of these were known as CDS (credit default swaps) which amounted to guarantees by a seller to make payment to the buyer should there be a credit default by a third party. We’ll come back to discuss CDSs further in the next section.
But first, let’s complete the picture so well laid out by Lawrence McDonald. He compares the operation of CDS trades to those in a regulated market, such as the stock exchanges or regulated derivative markets such as the CBOE (The Chicago Board of Options Exchange). When trades are made in those markets, the buyer must deliver payment by the settlement date or the trade is cancelled. In the case of stocks, settlement is required within three days.
McDonald says the problem became blatantly evident to Geithner in…
Marshall Auerback was on BNN’s SqueezePlay yesterday talking about the crisis in Greece (this time without his banker’s pinstriped suit – but we all know he’s a fund manager anyway!). He made some interesting comments about currencies I wanted to run by you.
Greece is the Bear Stearns of sovereign debtors
I know you have already seen comments from me, Marc, Claus, and the other Edward on Greece today. But this is a very big deal. Marshall calls it the Bear Stearns event in the sovereign debt crisis, a line he got from me. Here’s the thinking:
It reminds me a little of the subprime crisis. When it engulfed Bear Stearns, policy makers stepped in with bailout money. The immediate problem of Bear Stearns’ collapse was solved, but the systemic issues remained. Yet, recklessly, policy makers did almost nothing in the few months afterwards to deal with those issues. This was a crucial error given that people like me were warning of impending calamity. I was mystified (see comments at the end of my Swedish crisis post). The Minsky moment came and policy makers missed it entirely.
In fact, many were incensed because they thought Bear should have failed. So when Lehman came around, it did fail. And we all know how that turned out.
So, here we are again. The sovereign debt crisis has been building for three months now – ever since Dubai Worldannounced it wanted to default on its loans. In my view, we have now reached a critical juncture. If Greece is allowed to default, all hell will break lose. On the other hand, Greece has run a deficit for years. It’s ‘cheated’ to meet the standards set forth in its previously agreed-to treaties and it is unwilling to take austerity measures that Ireland, faced with similar circumstances, has taken. What should the EU do?
The dilemma is this: how do you eliminate moral hazard for perceived free riders while still credibly safeguarding against the destruction and contagion that a Eurozone sovereign default would create?
"We have always known that heedless self-interest was bad morals; we know now that it is bad economics. Out of the collapse of a prosperity whose builders boasted their practicality has come the conviction that in the long run economic morality pays…
We are beginning to abandon our tolerance of the abuse of power by those who betray for profit the elementary decencies of life. In this process evil things formerly accepted will not be so easily condoned…"
Franklin D Roosevelt, Second Inaugural Address, January 1937
The hubris associated with the trading crowd is peaking, and heading for a fall that could be a terrific surprise. It seems to be reaching a peak, trading now in a kind of euphoria.
I had a conversation this morning with a trader that I have known from the 1990′s, which is a lifetime in this business. I have to admit that he is successful, moreso than any of the popular retail advisory services you might follow such as Elliott Wave, for example, which he views with contempt. He is a little bit of an insider, and knows the markets and what makes them tick.
He likes to pick my brain on some topics that he understands much less, such as the currency markets and monetary developments, and sometimes weaves them into his commentary, always without attribution. He has been a dollar bull forever, and his worst trading is in the metals. He likes to short gold and silver on principle, and always seems to lose because he rarely honors his first stop loss, which is a shocking lapse in trading discipline.
His tone was ebullient. The Street has won, it owns the markets. They can take it up, and take it down, and make money on both sides, any side, of any market move. I have to admit that in the last quarter his trading results are impeccable.
We diverged into the dollar, which he typically views as unbeatable, with the US dominating the international financial system forever. He likes to ask questions about formal economic terms and relationships, or monetary systems and policy. He
Please play this must-see video by Alan Grayson explaining in great detail exactly why the Federal Reserve does not want to be audited, and thus why it absolutely needs to be audited.
"Let’s find out once and for all who owns the hotels, who owns the houses, and let’s try and put this wild beast that creates money out of nothing and jams it in the pockets of special interests like Maiden Lane, like Bear Stearns, like JPMorgan, like all their friends. Let’s put them under some degree of restraint before it all comes crashing down, on us."
For the fourth consecutive week, the worldwide rally continues unabated. Seven of the eight indexes on my watchlist posted strong gains with Japan again topping the list with its 3.63% advance. Hong Kong's Hang Seng was the one index to take a breather. Amazingly enough, that Nikkei surge was three percent smaller than the previous week's 6.67%.
The Shanghai remains the only index on the watch list in bear territory -- the traditional designation for a 20% decline from an interim high. See the table inset (lower right) in the chart below. The index is down over 34% from its interim high of August 2009. At the other end of the inset -- four indexes, the ones for Germany, the UK, and J...
Public health historians discuss thwarted efforts to hold the lead industry accountable for toxic exposure threatening American children.
Science can be a battleground — witness the politics of climate change, the teaching of evolution, the uncharted terrain of genetic modification and stem cell research, among other contentious issues. But when industries release untested chemicals into our environment — putting profits before public health — our children are the first to suffer. Nowhere is this more troubling than in the ongoing story of lead poisoning.
Bill talks with David Rosner and Gerald Markowitz, public health historians who’ve been taking on the chemical industry for years — writing about the hazards of in...
Not a day passes without the financial media denouncing gold as an investment option and hailing the bureaucrats heading the world's monopolist monetary central planning agencies as superheroes. It began prior to gold's recent breakdown, with widely cited bearish reports on gold published by Credit Suisse and Goldman Sachs, among others. Never mind that most of their arguments were easily unmasked as spurious. ...
U.S. equity futures traded slightly lower in early pre-market trade following mixed economic data out of the eurozone. The moves follow basically flat trading on Wall Street from Monday after futures rallied into the open following weaker than expected Chinese data.
In other news around the markets:
The German ZEW Economic Sentiment Index rose to 36.4 in May from 36.3 in April but missed expectations of a gain to 38.3. The current conditions index was also weak and over 77 percent of respondents said they do not expect another rate cut in the next six months.
It seems that every Tuesday in 2013 since January 8 has been positive on the Dow. And this past Tuesday was no exception. Now that sounds like a trend to put money on -- buy the SPDR Dow Jones Industrial Average ETF (DIA) at the close each Monday and close out the position late on Tuesday.
The Dow and S&P 500 both hit new all-time highs once again on Wednesday, while the Nasdaq hit its highest level since November 2000. The “risk on” allocation of new investment capital into cyclicals continues, although Wednesday saw leadership from defensive sectors Consumer Staples, Utilities, and Telecom, along with Financials. Nevertheless, ConvergEx reports that the average correlation of the ten S&P business sectors to the overall index averaged 82% last month. While that is below the 86% averag...
BMY - Bristol-Myers Squibb Co. – Shares in drug maker, Bristol-Myers Squibb Co., are ripping higher today, up 6.5% at $44.94, the highest level in more than a decade, ahead of the release of the American Society of Clinical Oncology (ASCO) 2013 Annual Meeting abstracts tonight. The ASCO Annual Meeting begins on May 31st in Chicago. Options on BMY are far more active than usual today, with overall volume topping 64,000 contracts by 12:25 p.m. ET, versus average daily volume of around 11,400 c...
We are starting to see some very extreme readings on our monthly and weekly index charts since there has been no correction this year. I posted below first the monthly chart of the S&P 500 going back 15 years showing bollinger bands – rarely do we get above the upper one, and never have we been this far above. Then below that I posted (with 4 charts of 4 years each) the weekly data and you can see we are at a rare time we are above the weekly bollinger band as well. This non stop rally is getting very historical.
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Stock market posts another record setting week, but the big news came after Friday’s close.
Courtesy of NASA
The stock market put on another record setting show with the Dow Jones Industrial Average (NYSEARCA:DIA) closing at a record high 15,118 and the S&P 500 (NYSEARCA:SPY) closing at 1633.70, another all time closing high.
For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) gained 1%, the S&P 500 (NYSEARCA:SPY) climbed 1.2%, the Nasdaq Composite (NYSEARCA:...
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Well, well, well....it is good to know that there are others in the scientific arena who believed that YMI Bioscience's data (cough - Gilead) is a better drug than Incyte's Jakafi. Now, the definitive data are still unknown, but there was enough evidence from a Phase 2 trial to take a small risk for a huge reward. So, let's forget about Apple (AAPL), and do nothing but biotechs from now until Congress passes universal health care coverage for prescriptions....and drive the prices down so that research and development is no longer feasible to conduct in the US. Even Seattle Genetics (SGEN) has been on a tear as of late...
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